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Zambia’s Finance Minister calls on China to head its foreign debt restructuring talks

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Local Market Commentary

  • Zambia’s Stanbic Bank PMI moved back above the 50-point mark at the start of Q2. Specifically, the index rose to 50.5 in April from 49.6 in March amid returns to growth of output, new orders and employment in the private sector. That said, there were further signs of building inflationary pressures amid widespread reports of higher fuel costs. Note that higher fuel costs pushed up purchase prices to the greatest extent in ten months while staff costs also rose. In turn, companies raised their own selling prices at the fastest pace since July last year, with charges now having increased for the three straight months. Therefore, concerns around the impact of rising prices led business confidence to fall to a 14-month low with expectations that the rise in costs would be passed on to consumers.
  • While progress has been slow, Zambia is making small strides toward restructuring its $17.3bn in foreign debt, a move required for the country to secure a much-needed program with the International Monetary Fund. Recall that China, the single largest creditor of Zambia’s foreign currency debt, in April signalled that it would join the debt restructuring committee, injecting fresh blood into a stagnated process.
  • Finance Minister Siitumbeko Musokotwane said it makes sense for the country’s largest creditor to play a leading part in the debt restructuring process. Musokotwane said on Thursday that “they are willing to participate as co-chair, and we welcome that because it will improve the chances of resolution – them being the biggest single creditors.” Zambia’s debt restructuring forms part of the G20’s Common Framework designed to help provide reprieve for heavily indebted countries in the wake of the pandemic.
  • China has been the biggest stumbling block in the debt restructuring process. However, with Beijing now on board, the light at the end of the tunnel for Zambia appears to be nearing. Despite the delays, the Finance Minister said Zambia remains on track to complete restructuring talks by the end of next month and win final approval for the loan from the IMF’s board. Bloomberg reported that France and South Africa have also offered to co-chair Zambia’s creditors committee, which will negotiate a restructuring of the debt within the confines of a debt sustainability analysis findings that the World Bank and IMF completed earlier this year.
  • Under the Common Framework, Zambia will then ask private creditors to negotiate comparable terms for their debts. While Zambian bonds remained under pressure on Thursday, this was primarily due to gloomy external conditions as the global risk-off trade continued. Once risk appetite returns, we expect a recovery in Zambian bonds following the positive developments on the fiscal front this week.
  • The industrial metals complex is currently mulling over the global growth conundrum and whether or not the Fed raising rates aggressively this year coupled with the lockdowns in China have the ability to unseat the demand side of the equation over the short to medium term. As a result the 3m LME copper benchmark is on track to record its fifth weekly fall with the contract changing hands at $9475.00/tonne as we head into the start of the EU trading session.
  • Structurally, we still see the likes of copper having a bright future given all the infrastructure projects related to the roll out of green energy programmes in the coming decades, however short term volatility is inevitable given the current geopolitical and macro-economic backdrop.
  • Moving over to the FX markets, the Zambian Kwacha is expected to be on the front foot next week as hard currency supply outweighs demand. Meanwhile, the USD is looking to end its fifth week in succession in the green. Risk aversion is surging, and a rotation into USDs is unfolding. Investors have turned back to focus on interest rate policy disparity between the U.S. and its major trading partners. In focus today will be the latest round of non-farm payroll data. A strong reading that matches the 391k expectation would only further enhance the USD’s attraction. In the meantime, equity markets have tumbled and look set to slide further as investors price in a much more difficult economic climate ahead. The EUR gave up Wed’s gains to slide back towards 1.0500 yesterday, while the GBP, in particular, plummeted back below 1.2400 following warnings of recession in the U.K., given all the global headwinds to growth that continue detracting from growth.

 

Rand and International FX Commentary

  • As dramatic as the ZAR’s recovery was earlier this week, yesterday’s reversal back in favour of ZAR weakness was even more dramatic. The move was reminiscent of the volatility experienced in April 2020 when the authorities first implemented lockdowns. Financial markets once again turned their focus to the effects of the Fed’s stance and how aggressive it is. The Dow tumbled over 1,000 points to more than offset the prior gains, and overall risk appetite has collapsed.
  • Central banks have spooked the markets, and investors are now responding. This holds the potential to turn ugly if central banks do not soften their stance or inject some sensitivity into their policy positions. We are seeing a glimpse of what might unfold if the Fed follows through with its policy position, and its warnings that the adjustment could prove painful may prove to be an understatement. Although this is another reason why one could argue that the central banks will not be able to deliver on their guidance, the market has little to go on right now other than what the central banks have released.
  • Heading into the weekend, traders across several financial markets will likely prefer to be neutral. Between the war in Ukraine that holds more inflation and growth consequences for Europe, the Covid response in China and the aggressive central bank positions, any further bad news could spark a material selloff. It is clear that this has become a more risk-off trading environment, and the ZAR, along with other EMs has turned vulnerable.
  • The last piece of important news heading into the weekend will be the US payroll data. As it stands, the USD is headed for its fifth consecutive winning week. Market participants are anticipating a solid rise in payrolls of 391k. Anything as strong as that, if not stronger, only builds the case for tighter US monetary policy, and the USD could surge. Therefore, all eyes and focus will shift towards the US this afternoon for further direction.

Nicholas Kabaso

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